Suppose you purchased a house exactly 5 years ago at a cost of $450,000. Assume that you were able to make a down payment of 20% of the purchase price, and you negotiated a conventional 25-year mortgage for the remaining balance. The fixed rate on the mortgage was 8.25%, and banks are required to compound interest semi-annually.

(i) What is your monthly payment?

(ii) Suppose mortgage rates fell over the five years such that now, rates on 20-year mortgages are presently 5.85%. What is your remaining mortgage balance immediately prior to refinancing? How much have you paid in interest, and how much have you paid in principal over the last 5 years? Calculate your new monthly payments if you do indeed refinance. 

(iii) Suppose you decide to continue to pay your initial monthly payments instead of the newly calculated payments. How long will it take you to pay off your mortgage?

Answer rating: 100% (QA)

i Monthly Payment Calculation To calculate the monthly mortgage payment we can use the loan payment ... View the full answer